Getting Udaan IPO-ready: The inside story of a pivot

Sharp cuts in valuation is not uncommon during a funding winter. But the fact is that $340 million is a lot of money. It was also one of the biggest late-stage deals of 2023 in India after PhonePe ($850 million); Lenskart ($600 million); Flipkart ($600 million); DMI Finance ($400 million) and Ola Electric ($385 million), according to an analysis by Entrackr.

The funding was raised on the back of a new strategy. Udaan, which sells everything from mobile accessories and bath fittings to medicines and footwear, badly needed a pivot. In 2022-23, its revenue had shrunk and the business bled. Intense competition in the business-to-business (B2B) trade market impacted the already wafer-thin margin the sector is known for.

Sample this: The company’s gross revenue jumped multifold year over year, touching nearly ₹10,000 crore in 2021-22. In 2022-23, revenue dropped by a massive 43%, according to data sourced from Tracxn. During the year, it reported losses of ₹2,076 crore.

The online B2B channel in India operates at 0-6% gross margin, which is lower than the 5-7% made by the offline distributors of fast-moving consumer goods (FMCG) products, according to a 2022 report by Jefferies on kirana e-commerce.

As Udaan’s losses mounted, concerns arose regarding the viability of its business model. “This is a very punishing market if you don’t have the right cost and revenue structures in place,” said a former Udaan executive, requesting anonymity. “Everybody’s woken up to the fact that this is a low margin business,” the executive added.

Udaan, therefore, is no more the company it was a year ago. The company grew rapidly before the pandemic and was one of the fastest startups to achieve the coveted unicorn status in 2018. But in the last two years, it has closed operations in several cities, consolidated categories, laid off a large number of employees and transitioned to a more cost-efficient model. Indeed, the company wants to go public in the next 18 months.

What exactly is the new model Udaan is pinning its hopes on? Before we answer, let’s look at the company’s beginnings and why it galloped the way it did before the pandemic.

Middle India pitch

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Udaan, founded by three former Flipkart executives—Amod Malviya, Sujeet Kumar, and Vaibhav Gupta—started in 2016.

It started as a marketplace that was different from Flipkart or Amazon. While the two e-tailing giants focuses on consumers, Udaan wanted to play in the unorganized market of B2B trade. It wanted to connect farmers, wholesalers and retailers on one platform. The company started with apparel and electronics and then expanded to food, consumer goods and pharmaceuticals categories. Over time, it also introduced an inventory-led model. For instance, it stocks goods from FMCG brands.

For the three founders, all of whom came from small towns in Uttar Pradesh and Bihar, the vision was to build for middle India. “I never wanted to go and focus on luxury markets or luxury goods. That does not excite me. What drives me is solving for the large population,” Vaibhav Gupta, also Udaan’s chief executive officer (CEO), told Mint during an interaction.

Udaan’s pitch managed to grab investors attention right away. The fact that the founders were from Flipkart and had a successful track record of scaling an e-tailing business helped. It has raised about $1.5 billion thus far, a mix of debt and equity.

According to a report by AllianceBernstein, a global asset management firm, Udaan’s reach increased from 0.5 million cumulative number of buyers in December 2018 to 1.7 million by December 2020.

Another report by Redseer, an advisory firm, stated that by 2022, nearly half the existing user base of online B2B platforms planned to increase their spends on two companies—Udaan and JioMart, the online wholesale platform by Reliance Retail Ltd. But while Udaan is a pure play online venture, JioMart is an omnichannel business.

Over time, Udaan built a marketplace that serviced sellers and buyers through centralized warehouses and a centralized supply chain. This scale of operations came back to bite the company.

Age of experiments

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Flush with cash, Udaan embarked on an experimentation spree—just too many before the pandemic, according to an industry executive who requested anonymity.

“They were running 12 different categories, some 50-odd subcategories, experiments in logistics, business-to-consumer (B2C) couriers. There was just too much going on,” the executive said.

For instance, in 2020, the company tested waters in B2C through an app called Pickily. The idea was to enable quick fulfilment through the dark store model. The experiment did not see the light of the day.

With the funding winter approaching, it suddenly got very expensive to maintain so many experiments, added the industry executive.

While everything digital boomed during the pandemic, pure online models, be it in edtech or e-commerce, started fumbling as things opened up post the lockdowns. “Our estimates say that during covid-19, about 25-30% of retailers used Udaan or equivalent services. Today, however, that number is about 15%,” Kanishka Mohan, partner at Redseer, said.

In 2020, Udaan launched a B2C app called Pickily. The idea was to enable quick fulfilment through the dark store model. The experiment did not see light of day.

Meanwhile, some FMCG brands sell limited supplies to Udaan to protect their relationships with traditional offline distribution networks. In fact, in 2021, Udaan had filed a complaint against FMCG major Parle Products before the Competition Commission of India (CCI), alleging that Parle had abused its dominant position by refusing to supply their products directly to Udaan. The CCI turned down the plea, noting the manufacturer’s autonomy in choosing its business partner.

Udaan’s CEO, however, told Mint that the FMCG problem is largely solved; that most brands believe Udaan is a parallel channel. “At least 90% of them are giving complete supply to the demand we are raising,” Gupta said.

Within the categories, pharma became difficult to crack, multiple current and former employees told Mint. A more organized category, the company struggled to find a value addition it could provide in the drug supply-chain.

The big pivot

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This brings us to Udaan’s operational pivot. From big to small, from centralized operations to hyper-local.

The company now has a cluster approach—Udaan finds out the densest demand area in a city and sets up a localized supply-chain. India is divided into 50 clusters. Each cluster has its own supply chain, own warehouse, own fulfilment centres. These centres stock and serve only the designated cluster. The approach optimizes costs since the company doesn’t waste money serving a few customers outside of the major demand centres.

“Because we expanded across India, we did get scale. But, it was important to focus on demand in a small neighbourhood to optimize cost alongside scale,” the CEO explained.

The pivot also worked for the customer, he added. “It enables us to do next day delivery. And it also enables us to carry a very localized portfolio, which is relevant in India because the rice, the flour and the pulses which get bought and sold in Bengaluru are different from the rice you buy in Hyderabad,” Gupta further said.

It was important to focus on demand in a small neighbourhood to optimize cost alongside scale.
—Vaibhav Gupta

The localized approach, meanwhile, has helped Udaan map its customer base better—the size of a shop; its location; the estimate of what products the shop carries. “Once we do that, we get a sense of what the market demand is. Our goal is that our shopkeepers should be able to find at least 80% of the products they keep on our platform,” the CEO said.

Investors appear to like this model—like we mentioned earlier, the large funding round last year was on the back of this new strategy.

“Udaan’s cluster strategy serves as a compelling blueprint for the company to scale its operations profitably, setting a new standard of excellence in the industry,” Bejul Somaia, partner at Lightspeed, Udaan’s biggest investor, said. “The cluster approach transforms how Udaan engages with the kirana stores by delivering sharper value propositions. This focus enhances customer satisfaction and drives improved service levels, higher buyer retention, share of wallet and order frequency,” Somaia added.

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Nonetheless, the new model means a much smaller business for the company. As part of the restructuring, it has scaled back on categories and cities. Pharma is one of them.

“There was a team of 20-30 people in pharma and Udaan was once doing ₹30-40 crores in business. They have been consolidating the vertical,” said a former employee who didn’t want to be identified. Six months ago, the pharma business shrunk to about ₹22 crore; the team was cut to just 6-7 people, he added.

While Gupta did not comment on the size of the pharma business or the employee count, he agreed that the company was consolidating the category and it now operates only in Bengaluru from a pan-India focus earlier. He calls it “geography-specific category optimization”.

“We have expanded the portfolio; we have expanded the coverage and our Bengaluru business in pharma has grown over the last nine months, almost doubling in scale,” Gupta said.

Private affairs

Udaan, meanwhile, is also pressing ahead with its private labels business—a high margin game—and an important piece in the company’s path to profitability. Private labels were first added in 2021.

“For a similar product, national brands give you 3-5% margin; regional brands or smaller brands 8-10%; private labels offer up to 15%,” Mohan of Redseer said.

Captain Harvest (atta, rice, salt), Annabhumi (atta), Jayabhumi (rice and pulses), Bold & Classic (lifestyle) and Fabclassic (home & kitchen) are some of its private labels.

While some people Mint spoke to said that the private labels business is yet to gain traction, Gupta disagreed. “In the Bengaluru cluster, they (private labels) have scaled up from single digit to above 10% of the overall business now, just in the last two months. It’s a big part of our strategy,” the CEO said.

The crowd

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Udaan’s margins, meanwhile, face another challenge—growing competition.

A host of companies, big and small, old and new, have mushroomed in the B2B commerce space. Udaan doesn’t have the tailwind that Flipkart did, some market watchers pointed out. The consumer e-tailing space, by the time Walmart bought Flipkart in 2018, was a duopoly (Amazon being the other giant). But B2B is more crowded with well funded players.

There is ElasticRun (the company calls itself a “B2B e-commerce platform for rural India”); ProcMart (it raised $30 million in a Series B round in April); Flipkart Wholesale; AmazonDistribution; Supermarket Grocery Supplies (BigBasket’s B2B arm) and Metro Cash & Carry India (a unit of Reliance Retail). Besides horizontal commerce platforms, there are single category players as well—they focus on building a business around one category. Ninjacart (agri) and Jumbotail (food and grocery) are two of them. Further, FMCG companies like HUL and ITC have also been working on their own online B2B platforms called Shikhar and Unnati, respectively.

Udaan has already gone on an overdrive to conserve cash. Gupta said the company has reduced its burn by 80% in the last two years as it trimmed operations.

How the dynamic between FMCG brands and B2B e-commerce players unfold, going ahead, will be key to Udaan’s path to profitability and its ambitions of a public listing. Some time back, the company was eyeing an IPO in 2023. That timeframe has stretched—it would be ready for the public markets in the next 18 months, company executives said. The task, therefore, is cut out.

Udaan has already gone on an overdrive to conserve cash. Gupta said the company has reduced its burn by 80% in the last two years as it trimmed operations. With the new focus on hyper-local, he thinks the company has finally cracked the B2B code. Now, it has to demonstrate a few quarters of profitability, an executive quoted above said. How soon remains the billion-dollar question.